LEGALITY

CHP. 9 - Pages 186 - 199

Chapter Overview

A contract can be made illegal in several ways. A contract may involve something that violates statutory law, either civilly or criminally. Sometimes making the agreement itself can be illegal. When someone agrees to commit crimes for a promised consideration, he or she is involved in conspiracy, which is illegal. Other agreements are illegal because they violate public policy. In this chapter, you will be able to avoid problems that you might encounter when entering into a contract.

Six Required Elements of a Contract

  1. OFFER
  2. ACCEPTANCE
  3. GENUINE AGREEMENT
  4. LEGALITY
  5. CAPACITY
  6. CONSIDERATION

Section 9.1 – Agreements that Violate Statutes

ILLEGALITY AND DIVISIBLE CONTRACTS

If any part of an agreement is illegal, the contract is void. Sometimes a part of the contract is valid and is said to be divisible. The court may enforce that part of the contract.


If both parties knew it was illegal the court will not aid either party. If one of the parties is innocent the court may help them recover their money or property.


VIOLATING CIVIL AND CRIMINAL STATUTES

Agreements that require one party to commit a tort or a crime are illegal.


~an agreement is illegal if it’s made to interfere with or violate the rights of another person

~an agreement is illegal if it protects one party from the consequences of torts or crimes committed …both parties would be liable for their illegal acts


USURY STATUTES

Usury - charging more than the maximum legal interest rate


  • Ohio has a usury cap for personal loans of 21%; 8% for home loans



An agreement in which a borrower agrees to pay more that the maximum legal interest rate would be illegal and not enforced by the courts (void).


GAMBLING STATUTES

Ohio gambling laws allow for wagering on horse racing, as well as gambling at casinos. Also, the state allows certain charitable and non-profit organizations to engage in limited gambling for fundraising efforts, such as raffles and bingo. However, bookmaking -- the process of placing bets on sporting events or other contests -- is strictly illegal in Ohio.


Example: If you bet on the Super Bowl and win but the person you made the bet with does not pay you, you cannot sue. Your agreement is invalid because it is illegal.


LICENSING STATUTES

All states have statutes that require persons to have a license to practice certain trades or professions These laws are in place to protect you from dealing with unqualified persons.


Examples of trades/professions that need a license:


  • teacher
  • lawyer
  • doctor
  • electrician
  • plumber
  • hair stylist

If you hire an unlicensed plumber to fix a leak in your house and he/she does an awful job, you cannot sue that person because they are unlicensed. The agreement is illegal.

Section 9.2 - Agreements Contrary to Public Policy

Some agreements are illegal because they violate a time-honored legal doctrine known as public policy.


Remember, the government is thinking of the greatest good principle when applying public policy doctrines. Decisions are made based on whether a policy will create the greatest good for the greatest number of people…every action has the potential to affect other people.


The ability to regulate the health, safety, welfare and morals of the public is a power that belongs to the government.


No one should be able to do anything that harms the public.

Example: The mayor has a duty to act in the best interest of the people in his/her town.


The most common agreements that violate public policy are:


Agreements that involve an unreasonable restraint of trade

The law tries to be a protector of the rights of persons to do business freely in a competitive market…if people enter into contracts that take away these rights, the law will restore the rights to them.


Restraint of trade - a limitation on the full exercise of doing business with others


There are 3 types of contracts that are considered unreasonable restraints of trade:

1-Contracts Not to Compete (sales and employment contracts)


Restrictive covenant: a promise not to compete

  • will be upheld by a court if it is reasonable in time and geographic location


If the restraint is unreasonable considering the nature of the business sold, then the restraint is unreasonable and unenforceable.


A promise not to compete agreement in an employment contract would mean employees would agree not to work at similar job for a period of time after they leave a company.


  • These agreements protect the former employer from unfair competition (example: advertising agency taking away clients)


2-Price Fixing

The law views competition in the marketplace as an efficient way of determining prices.


  • Occurs when competitors agree on certain price ranges within which to set their prices
  • Discourages competition and raises prices
  • Not enforced by courts…price fixers may be prosecuted (felony)
  • Example: agreement to raise prices - This is when all competitors agree to raise prices of a product by a certain amount.
  • Apple has its own stores, so it can always run full-price and not be accused of illegal price-fixing.

3-Agreements to Defeat Competitive Bidding

A bid is an offer to buy or sell goods or services at a stated price.


Competitive bidding
occurs when rivals submit bids for a project; typically the firm with the lowest bid wins the contract. If bidders come together and agree not to bid lower than a certain price, their agreements and contracts are not enforceable.


Agreements to Obstruct Justice

Any contract that interferes with the administration of justice is illegal.


Three agreements that would be considered obstruction of justice:

  • protecting someone from arrest
  • filing false police reports
  • giving false testimony
  • bribing a juror, agreeing to pay a non-expert to testify at a trial, or agreeing not to prosecute a person who has committed a crime in return for money.


Agreements Inducing Breach of Duty or Fraud

Many people hold positions of trust. They have a responsibility for the well-being of other people and work for the best interests of the public.


Any contract that tries to influence these representatives to use their positions for private gain is unenforceable.


Agreements Interfering with Marriage

The law encourages marriages and protects family relationships.


Contracts that discourage, harm, or interfere, with good family relationships are illegal and unenforceable.


Example: Your grandma offers to give you $25,000 to divorce your wife. You do and she only gives you $5,000. You will not be able to sue grandma because this was an agreement to interfere with marriage.

Effect of Illegality

  • The courts will not aid either party to an illegal contract. Parties will not be able to enforce the agreement or receive aid from the court unless the parties are not equally at fault.
  • Sometimes the court may be able to separate the legal parts of a contract from the illegal parts and enforce those. If not, the contract will be void.